LTD premium cost as taxable income produces non-taxable benefit?

[Guest Benefits Maven]

We have two employees who are convinced that if we give them

the amount the employer paid for LTD premiums for the year

they can include the amount as taxable income on their W-2

and pay the taxes on that income, thereby rendering any LTD

benefits received in future non-taxable.

I have my doubts. Any thoughts?

[Bill Berke]

As a general rule, employer paid LTD means benefits are taxable upon receipt. If the employer pays the premium as a convenience to the employee and charges the employee with the premium as additional income to the employee in the same tax year, then I think you have a case for claiming employee paid LTD, thus no taxable benefits.

[KIP KRAUS]

Let me see if I have this right. My employer for instance pays about $250 a year in premiums for my LTD coverage and then pays me $250 in income, right? So my employer is going to match my FICA and pay unemployment insurance premiums on this additional $250 in income to me. Sounds like a bad deal for the employer to me. However, if this does happen how does one identify the payment to me as payment for the LTD premium? How does the employer account for the premium if he is giving it back?

If the employees are that concerned with the taxability of the premiums make the plan totally contributory and gross everyone up for the premiums. This I could see provided the employer wants to be that generous.

[Guest Benefits Maven]

I agree that grossing-up in some form or other would be the only real solution if the company wanted the extra cost - which I doubt would be worth it. My problem is how to answer these two employees without changing the way we pay LTD (100% company paid, no gross ups). Their accountants insist that by including the premium the company paid on their individual tax return, their benefit, if received, will be non-taxable. (Without the company making any changes at all in the way we do things) Somehow, I just don't buy it. Any thoughts how I can answer these employees?

[KIP KRAUS]

Is the accountant saying to include the cost as imputed income? I’d want to see the IRS reg. Before I’d agree with that theory. Have the employees get the IRS site for their accountant’s theory. Of course the other thing that you may want to tell these two employees is that if you do it for them you'll have to do it for everyone, and everyone may not want it done this way. Unlees they are planning on being totally disabled soon, I don't think it's a good deal to pay extrs taxes just in case.

[Guest Benefits Maven]

Thanks. I agree. I'm not sure it would have the effect they desire and it would have to be done for all. I surely don't want to pay taxes on my LTD premiums and I think the majority of people would agree. I've already asked them to go back to their accountants and get specifics. We'll see what happens.